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Semiconductors: Poised to Power the Internet to New Heights

The volume of connected data generated by society will continue to increase dramatically in the years ahead, and semiconductors will remain at the core of this growth. In this issue of The Parnassus View, Parnassus Chief Investment Officer Todd Ahlsten shares his thoughts on the direction of information technology, using the examples of two companies that are helping shape the future of the semiconductor industry.

Data Explosion and Semiconductor Innovation

According to Forbes, “more data has been created in the past two years than in the entire previous history of the human race.”i Today, the storehouses of the internet—data centers and the cloud—contain massive amounts of data for uses ranging from consumer tracking to artificial intelligence applications.

Over the coming few years, this unparalleled explosion of data will only accelerate, generating tremendous demand for semiconductors, the building blocks that power computers and the internet. At the same time, semiconductors are rapidly becoming more complex, compact and efficient as circuits are made smaller and stacked higher on silicon wafers. These layered semiconductors save energy and increase the speed of computing while lowering costs for the consumer and creating possibilities for entirely new industries.

Connectivity and the “Virtuous Cycle of Growth”

As the internet continues its expansion, Intel CEO Brian Krzanich is taking the armies over the hill in search of growth opportunities. Intel, the largest semiconductor company in the world, has shifted its focus from the PC to an all-encompassing view that emphasizes the connectivity of devices with the cloud and data centers.

“Our vision is very simple: if it consumes electricity, it’s going to end up computing, and if it’s computing, it will be connected to the Internet,” explains Kirk B. Skaugen, Intel Vice President and General Manager of the PC Client Group.ii

This interconnectedness of devices and data centers creates a “virtuous cycle of growth.” As the technology used in devices advances, data centers are pressed to catch up, and vice versa. Companies like Apple and Google depend on advances in speed, energy efficiency and flexibility from Intel and other semiconductor companies to support next-generation technology and, in turn, the semiconductor industry relies on Apple and Google to drive the demand for innovation.

New Technologies and Big Data in the Cloud

Along with more advanced semiconductors, advances in internet speed and capacity are spurring the development of new technologies that can transport the massive amounts of data stored in the cloud. Soon, 5G (fifth generation) high-speed connectivity will be deployed that may have four times the capacity of the currently used 4G networks. A range of data-intensive applications can be expected to take advantage of this development:

The Internet of Things, which includes any objects that are fitted with devices to send and receive data, will proliferate. Examples include retail products containing semiconductor chips and smart cameras in stores that will allow retailers to track consumer behavior.

Factory automation will jump to unparalleled levels, with technologies like robotics and sensors that will increase efficiency throughout the supply chain.

Self-driving cars, supported by massive data stored in the cloud, faster networking and advances in programmable memory, will revolutionize the transportation industry.

Medical applications, ranging from patient data to scientific research, will see tremendous progress with big data and connectivity advances.

As growth in these and other applications accelerates, pressure will increase for further innovations in semiconductors, data centers and the cloud.

Intel on the Cutting Edge

As noted above, Intel has shed its image as a PC company. But neither is it solely a data center company. The firm is now innovating on multiple fronts simultaneously in anticipation of the explosion of big data. To support this effort, management has shifted their allocation of capital to boost industry growth across all aspects of an integrated internet industry.

One limiting factor to growth is the high cost of silicon, the material used for the chips that form the foundation of semiconductors. The cost of silicon has prompted manufacturers to layer circuits on chips to keep costs down. These stacked chips feature greater density and better performance, with less power usage on top of the reduced silicon costs.

Intel is using these increasingly complex semiconductors to integrate processing power, memory and software, giving the firm’s customers comprehensive packages—whether these customers are car companies, cloud companies, PC companies or companies utilizing the Internet of Things. For example, within the next ten years, fully autonomous driverless cars, which Intel characterizes as “data centers on wheels,”iii will be equipped with 3D mapping, navigation services and sensors. Each car could contain up to $1,500 worth of semiconductor content, whereas today’s cars contain about $100 in semiconductor content.

We believe Intel is in the best position to lead the semiconductor industry a decade or more into the future because the firm is sitting on a treasure trove of technology that will help it meet the challenges ahead. It is the most advanced semiconductor company in the world in terms of design, manufacturing and integrating computer power. The firm’s pricing power is very strong. Intel has few competitors, barriers to entry are high due to the technical capabilities required, and the company has the technological edge and vision to move further ahead.

Top Flight Quality Control by KLA-Tencor

If there is a potential weakness in the production of semiconductors, it is quality control. As the complexity rises, semiconductor manufacturers are challenged to keep production yields from falling to unacceptable levels. Manufacturers rely on state-of-the-art tools to review their processes and ensure that their designs are correctly implemented. KLA-Tencor specializes in providing quality assurance tools that can locate extremely tiny defects to improve yield.

Just as building skyscrapers involves many more steps than building single-story houses, finding defects in increasingly layered semiconductors—where distances are measured using units on the scale of atoms—is exceedingly more challenging than in single-layer chips. To handle this complexity, KLA offers leading analytics, metrology and defect-review tools to efficiently find microscopic errors in stacked components.

Operating in an industry with high barriers to entry, KLA has captured a large percentage of market share. It is one of the best companies in the world at monitoring the quality of semiconductors as they become increasingly complex. KLA partners with Intel and other companies to ensure that the manufacturing process remains high in quality and cost effective.

Sustainability Leadership

Three hundred times more information is projected to be available to users by 2020 than existed in 2005.iv This sea change is coming at an environmental cost, largely because of massive electricity consumption by data centers, making careful resource management an increasingly vital attribute of data-related companies.

Fortunately, Intel has long acted on its belief in the importance of conservation. For example, the firm has been the largest voluntary purchaser of green energy in the U.S. since 2008. The company has solar projects installed on many of its campuses and, as of 2014, its renewable energy certificates and projects totaled 100% of Intel’s annual energy consumption. v

Energy efficiency is also a key consideration in product design. By producing more energy-efficient processors, Intel is conserving energy throughout the life cycle of the product. Further, by working with KLA-Tencor to keep quality high, Intel is minimizing waste during the production process.

Setting the Stage for the Next Level of Connectivity

From the inception of the personal computer, and even before the PC, semiconductors have powered the development of information technology every step of the way. Intel made its mark during the personal computer era with its premium PC processor. Today, the firm’s products are supporting the entire virtuous cycle of growth—from the cloud and data centers to the Internet of Things and devices. With KLA-Tencor’s quality assurance support, Intel is uniquely positioned to continue leading the development of an increasingly complex and connected world.

The views expressed in The Parnassus View are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds.

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